In our 1983 paper we offered evidence that the law of demand operates inside the Federal Reserve. In particular, the Fed faces a requirement that it return all revenues in excess of operating expenses to the Treasury, and this constraint lowers the price of amenities in terms of foregone profits. The monetary authority accordingly buys more of the wage and nonwage perquisites of office than otherwise. Because we treated amenities as a monotone transformation of Federal Reserve System employment, our theory suggested that the Fed would pad its operating expenses by increasing the number of employees on its payroll. Moreover, given that expansionary open market operations raise the interest income earned by the Fed on its securities portfolio, bureaucratic incentives would impart an inflationary bias to monetary policy. In subsequent tests of the theory, we found a positive and significant ceteris paribus relationship between changes in the monetary base and the size of the Fed. This result suggested that one motivation for expansions in the money supply is to finance the growth in the Fed's bureaucracy. We also found evidence that employment causes money in the sense of Christopher Sims (1972), but not the reverse, and that the growth in Fed employment over time does not appear to have been due to the fact that more people are required to manage larger money stocks. In their comments, John Boyd and John Strong suggest that there are methodological and empirical problems with our paper. Both comments focus primarily on the, causality tests, but each raises other issues designed to cast doubt on the strength of our results. In what follows, we discuss the main points raised by our critics. I. Causality

In the analysis of the costs of monopoly power, the usual experiment is to convert a competitive industry into a monopoly and observe the consequent change in consumer's surplus. Modern contributions have emphasized the deadweight cost of monopoly (Arnold Harberger, 1954) and the possibility of an associated rent-seeking cost of monopoly (Gordon Tullock, 1967). The Harberger cost, of course, refers to the lost consumer's surplus triangle; the Tullock cost concerns the role of competition for monopoly returns. Taken together and assuming that the competition for monopoly rents is perfect, the total cost of monopoly power is a trapezoid, the rectangle of monopoly profits plus the triangle of lost consumer's surplus (Richard Posner, 1975). In this paper we approach the monopoly problem in a different spirit. We compare three states of the world-competition, regulation, and deregulation. In this setting we ask, what happens if a monopoly is eliminated through deregulation? Our analysis suggests that because under most conditions Tullock costs cannot be recouped, the returns to deregulation are lower than previously thought. Rent-seeking expenditures in the past leave the economy permanently poorer even if competition is restored to the industry. In contrast, the returns to preventing monopoly in the first place are relatively high in our model. An insight afforded by the analysis is an explanation of the persistence of laws and regulations which appear to serve no interest. In this regard the example of railroad regulation in the United States comes to mind. The standard explanation for such regulation is either that voters and government decision makers are ignorant of basic economics or that a small interest group like railroad firms wins rents at the expense of uninformed or economically rational consumers of rail services who do not find it cost effective to seek deregulation. We offer another and perhaps more plausible explanation for the persistence of regulation and the apathy of consumers about the costs of regulation. Namely, the costs of such regulations are, for the most part, the original rent-seeking expenditures that lead to the regulation in the first place, and these costs are sunk. Abolishing so-called uneconomic laws does nothing to recover these losses. Hence, there is little political support from any quarter to return to the status quo ante. In fact, as we shall show, such a deregulatory program can easily impose more costs than it is worth. There are numerous examples of this point, including tariffs and quotas of all sorts, subsidies to farmers, the postal monopoly, organized labor's antitrust exemption, the licensing of doctors, and so forth. The traditional explanations of these monopoly rights, namely ignorance of economic common sense and special-interest groups, are neither sufficient nor necessary. Since the primary costs of these laws are rent-seeking expenditures which are made prior to their passage, there is simply little to be gained by changing them now. Gains would accrue in the form of reduced Harberger costs; costs would be borne in passing and implementing the deregulatory program. It is not that the potential gainers from deregulation are large in number, diffuse, heterogeneous, and face high organizational costs, rather, they do not exist to any degree. Interpreted in this light, efforts by political action groups, such as the Right-to-Work Foundation, stand to be a drain on society's resources. They cannot produce anything unless they prevent further monopolization through regulation. We do not, of course, *McCormick and Shughart: Clemson University, Clemson, SC 29631; Tollison: Center for the Study of Public Choice, George Mason University, Fairfax, VA 22030. Thanks go to James Buchanan, Rex Cottle, and Gordon Tullock for helpful comments. The usual caveat applies.

The question of whether controls on the importation of foreign oil into the United States should take the form of tariffs or quotas has been a topic of recent public debate and investigation bv econonmists. Under static competitive conditions it is well known that equivalent tariffs and quotas can be constrtucted. Hence in this context, there is no choice to be mlade on economic efficiency grounds.' Hlowever, in a recent isstue of this Review, George Hay poinlts out that the actual market for oil in the United States differs fromii the required textbook conditions for equivalence. Under the U.S. oil import program which prevailed until recentl-, each refiner's quota for inmport of foreign oil is a positive function of his refinery input. Since import tickets are allocated free of charge, rather than auctioned, the form of the quota lowers the marginal cost of domestic refiners. Hay goes on to show that when combined with other static competitive assumptions, this quota mechanismi could generate greater consumer benefits in terms of lower prices than would an equivalent tariff (equivalent in the sense that the same percentage of imports is admitted).2 Hay expresses a preference for tariffs in a real world context and warns that his analysis of the price effects of the U.S. oil quota system holds only under very restrictive conditions. However, he does not address what is perhaps an even more important deviation of the domestic oil industry from the standard textbook model: crude oil production in the United States was limited in the major producing states by regulatory commissions that practiced market demand prorationing under the old oil quota program. Under this system, an-y price set by the industry is ratified by the commissions by limiting production to a level that will not result in the accumulation of undesired inventories.' We are not addressing the issue of the level of price in the oil industry in this paper. Rather, we wish to review the effects of tariffs and quotas on resource allocation, an issue which Hay omits from his analysis; and, for this purpose we make use of the simple model of a profit-maximizing monopolv as a characterization of the domestic oil industry. The assumption of profit maximiza-